Saturday, July 07, 2012

Steve Keen Aims At A Stationary Target

"Unlearning Economics" hasbeenposting on Steve Keen's Debunking Economics: The Naked Emperor Dethroned? The second edition was published in 2011 and the first edition in 2001. As far as I can see, the major substantive changes in the second edition consist of:

More on Keen's own dynamic systems approach, building on Minsky, to macroeconomic modeling.

Connecting up the intellectual bankruptcy of mainstream economics to the current global macroeconomic disaster

But I want to concentrate here on microeconomics.

A common mainstream response to Keen is to say that the cutting edge of mainstream researchers have transcended the issues Keen raises. At best, he is only attacking undergraduate teaching.

In the course of a decade, one might expect introductory teaching to have changed to incorporate some of this advanced research, at least if economics resembled many other academic disciplines. My sense, though, is that Keen had no need to update the sections on microeconomics, except to attempt other tactics in exposition, if he so chose. Am I correct?

Are mainstream economists more willing to teach General Equilibrium theory to undergraduates, including the proofs of the "near emptiness" of the theory? Do they teach that downward-sloping demand curves cannot be justified on the basis of individual utility maximization? Do they argue for downward-sloping demand curves on some other basis - perhaps because differences in characteristics among consumers balance out non-substitution effects in the aggregate (as in Werner Hildenband's research)? Has the absence of a chapter on game theory in Keen's book become more glaring, as it would be if David Kreps' textbook were more popular? Is the teaching of the theory of the perfectly competitive firm still vulnerable to Piero Sraffa's 1925 and 1926 papers? Is Robert Aumann's approach with a continuum of agents taught to undergraduates? Or, perhaps, teaching could become more focused on the empirical facts of behavioral economics, increasing returns to scale, markup pricing, and the structure of inter-industry flows and less focused on mistaken a priori neoclassical theory.

Mainstream economists are trained to be ignorant, including of the history of subject. This willful ignorance on history, as far as I know, has only become worse in the period between Keen's editions. Thus, if mainstream economics can ignore a criticism for about a decade, they can then relegate it to the (unstudied) history of thought. As I understand it, most of the arguments in Debunking Economics are decades old.

4 comments:

Judging from discussions emanating from blogs 'of note' it is pretty clear that the myth of microeconomic infallibility and autistic discussions on general equilibrium have great currency amongst the true believers beholden to the AEA establishment. We remain in the Dark Ages when it comes to analyses by the orthodoxy and nothing will change that; not even the lost decades that await us -- but at least future PhDs will be well versed in Real Analysis and other beautifully useless abstractions. Your blog remains a much needed tonic against conventional wisdom.

"This summer both Oxford professor Simon Wren-Lewis and Nobel laureate Paul Krugman have had interesting posts up discussing modern macroeconomics and its alleged needs of microfoundations.

Most “modern” mainstream neoclassical macroeonomists more or less subscribe to the view that microfoundations somehow has lead to better models enabling us to make better predictions of future macroeconomic events...Yours truly basically side with Wren-Lewis and Krugman on this issue, but I will try to explain why one might be even more critical and doubtful than they are re microfoundations of macroeconomics.

Microfoundations today means more than anything else that you try to build macroeconomic models assuming “rational expectations” and hyperrational “representative actors” optimizing over time. Both are highly questionable assumptions.

The concept of rational expectations was first developed by John Muth (1961) and later applied to macroeconomics by Robert Lucas (1972). Those macroeconomic models building on rational expectations-microfoundations that are used today among both “new classical” and “new keynesian” macroconomists, basically assume that people on the average hold expectations that will be fulfilled. This makes the economist’s analysis enormously simplistic, since it means that the model used by the economist is the same as the one people use to make decisions and forecasts of the future.

Macroeconomic models building on rational expectations-microfoundations assume that people, on average, have the same expectations. Someone like Keynes for example, on the other hand, would argue that people often have different expectations and information, which constitutes the basic rational behind macroeconomic needs of coordination. Something that is rather swept under the rug by the extremely simple-mindedness of assuming rational expectations in representative actors models, which is so in vogue in “New Classical” and “New Keynesian” macroconomics. But if all actors are alike, why do they transact? Who do they transact with? The very reason for markets and exchange seems to slip away with the sister assumptions of representative actors and rational expectations.

Macroeconomic models building on rational expectations microfoundations impute beliefs to the agents that is not based on any real informational considerations, but simply stipulated to make the models mathematically-statistically tractable. Of course you can make assumptions based on tractability, but then you do also have to take into account the necessary trade-off in terms of the ability to make relevant and valid statements on the intended target system. Mathematical tractability cannot be the ultimate arbiter in science when it comes to modeling real world target systems. One could perhaps accept macroeconomic models building on rational expectations-microfoundations if they had produced lots of verified predictions and good explanations. But they have done nothing of the kind"

Neroden, agree with your comment and retract my reference to autism. I have used the religious conotation vis a vis neoclassical economic analysis before, particularly w.r.t. the repression of debate by the high church.